The Reserve Bank board has another opportunity to right the wrongs it inflicted upon the Australian economy last year by cutting interest rates this Tuesday. And given what's happening in the economy right now, a rate cut is not optional — it's essential.

Don't get me wrong, I do not subscribe to the view that this will be a tough year overall as many of our political masters are saying right now. This message is also carried by the media messengers who love a good press release foretelling of doom and gloom.

Looking at the small business indicators that a lot of big end of town watchers unwisely choose to ignore, I think the economy is now on the road to improvement.

This is in contrast to last year when Treasury was predicting economic growth over four per cent and the RBA was worried about solid growth, booming mining export prices and a tsunami of related business investment in the pipeline.

They also feared inflation and that's why they encouraged the belief that maybe three interest rate rises lie ahead.

This trick based on poor economic and stock market forecasting, as well as a 'la la land' view of what was going to go down in Europe, broke business confidence while shocking consumers to turn to saving like never before.

All of this was going on when a systemic collapse of the banking system, thanks to the EU's ineptitude, was a possibility.

And despite all of this, the RBA waited until November to start easing monetary policy. I guess it's better late than never and I reckon their cuts in the last two months of 2011 have helped sentiment.

Small business owners are telling me the vibe is improving, with more proposals being called for by once reluctant clients and a sense of positivity is starting to enthuse sales forces.

Right now we know that manufacturing has expanded for two months in a row after a sustained period of contraction. Also the NAB business confidence index rose from 2.4 to 2.9 in December while business conditions improved from 0.8 to 1.2.

However, there are negatives that rate cuts will have to battle such as job cuts at banks, carmakers and even BHP Billiton.

Building approvals are near three-year lows, home prices are falling and home sales are near 11-year lows.

And even consumers are still reticent with the Westpac/Melbourne Institute index of consumer sentiment rising by 2.4 per cent in January to a reading of 97.1, which is still negative territory. Sentiment levels are still down 7.2 per cent on a year ago.

Meanwhile the Gillard Government is backing big pay rises. While overdue and going to needy people, the timing is not great with the dollar heading to 107 US cents.

I hope the Gillard team don't go overboard doing giveaways on the belief that they have to win friends to influence elections. It could wind up being like a teenager's trashed party where the adults will have to pay the inevitable bill.